Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

No More Safe Havens, Avoid Counterparty Risks

Commodities / Gold and Silver 2012 Jan 17, 2012 - 08:06 AM GMT

By: William_Bancroft

Commodities

Best Financial Markets Analysis ArticleIn this brief article about Safe Havens for investors we look at equities, bonds, and the current situation within the financial system, before asking whether gold bullion is being overlooked. We look at the degree of participation by institutional investors in the gold market and notice that they seldom invest in gold.

John Plender writes in yesterday’s FT that the pool of “super safe assets” is shrinking, whilst legal and advisory firms around the world scramble to prepare their clients for the implications of new currencies (or should I say old currencies returning in new guises).


Mr Plender considers whether “investment performance this year will hinge even more than in 2011 on making the right judgement on the evolution of Europe’s sovereign debt crisis… where a weak banking sector undermines the sovereign sector and vice versa”.

We are told that whilst the emerging markets have failed to perform as a haven, with the MSCI Emerging Markets Index falling 20.6% last year, only the highest quality bonds can be considered as insurance against the potential storm.

Searching for safety

The problem is that the range of depth of these potential high quality bond markets is shrinking.

The non-financial sector is sitting on huge cash piles, but not issuing much debt to fund investment. Good quality corporate debt is not as available as institutional investors would like, and certainly not with the depth of market they require. Mr Plender informs us, “global triple-A rated corporate issuance was down to $218bn in 2011 compared with $450bn in 2006”. Within this total, “US companies issued only $9bn compared with $140bn in 2006”.

All the while the apparent huddle of sovereign borrowers investors can bank on is being eroded by these financial tides; rather like the sea lapping at a group of sand castles. The debt pressures in Europe are still the proverbial tinder box within the global financial system, although other highly indebted entities, states, and municipalities might be enjoying a temporary respite from Mr Market’s revealing spotlight.

Whilst the UK gilt market and US treasury market are suggested for capital searching for a safe home, negative real yields abound. Things are still bad enough that many investors are willing to pay nations such as Germany to borrow from them, although Mr Plender urges that even Bunds cannot be regarded as safe.

The US treasury market is also not currently as liquid as global investors need, with the Federal Reserve buying so many treasuries itself as part of QE (are we QE2, 3, or ‘constant’ now?).

The problem is that market participants “are demanding more and higher quality collateral, which leads to further shrinkage in the pool of safe assets”. This is occurring as Merkozy’s policy of endless muddling is being put to its most severe test.

Can we take this analysis further?

Mr Plender is on the money with much of his analysis, which updates us on just how few corporate or sovereign bonds are really safe these days. However, one thing strikes us as peculiar within Mr Plender’s analysis.

In his discussion of super safe assets he only considers financial assets whose value depends on the performance of a counterparty.

These assets only have any value if the other side does what they promised. Bonds and debt instruments are only of value when the borrower pays you interest, and eventually returns the principal. Otherwise investors suffer through default.

As students of the Austrian school, and perceiving levels of significant and potentially unsolvable stress in the financial system, we find this notable.

In an environment of negative real rates and heightened systemic risk, should investors not look to other financial assets that hold no default risk?

When counterparties have little faith in each other, why not look to assets outside of the financial system?

What about gold bullion?

It seems imprudent to us not to even think about this. Gold and silver bullion have served as safe havens, and the ultimate form of money for millennia. Central banks are certainly discovering their allure once more, in what we perceive to be a great resetting of precious metals within the monetary system. Even now gold mostly makes up a pitiful percentage of central bank reserves.

So why should institutional investors not look at gold or silver?

Institutional investors could be deemed a herd of elephants within the global capital markets, yet they have not even dipped their toe into gold. Insurance firms and pension funds are not part of the gold market.

Shayne McGuire of the Teacher Retirement System of Texas, found the typical pension fund holds about 0.15% of its assets in gold. He estimates another 0.15% is devoted to gold mining stocks, giving us a total of 0.30% – that is, less than one third of 1% of assets committed to the gold sector.

This chimes with findings from one of our favourite research houses, Casey Research.

We suspect that some of this institutional money will come searching for gold over the next few years as more ‘safe havens’ fail to perform. Due to the gold market’s relative size, this could have an outsized effect on the gold price. This is to be expected should large pools of capital try to squeeze into a small market.

Avoid counterparty risk

However, even if gold was to maintain a constant price level throughout this year, we would prefer to hold a significant part of our wealth in gold bullion, than lend to the sovereign and corporate debt addicts of the world.

The lack of counterparty risk defines gold (and silver, gold’s volatile and some say better looking little sister). This lack of default risk shines for us right now.

We suspect it will continue shining for a good few years to come, even though there may be bumps in the road to test gold investors along the way. The Swiss banking tradition has always understood gold in this way, and advised its clients to always keep around 10% of their portfolios allocated to gold. Some Swiss advisers urge more, and in this case we listen to the bankers of the world.

For an asset to be “super safe” surely having significant default risk is unacceptable?

Ready to buy gold and silver? Get started in minutes…

Will Bancroft

For The Real Asset Company.

http://therealasset.co.uk

Aside from being Co-Founder and COO, Will regularly contributes to The Real Asset Company’s Research Desk. His passion for politics, philosophy and economics led him to develop a keen interest in Austrian economics, gold and silver. Will holds a BSc Econ Politics from Cardiff University.

© 2011 Copyright Will Bancroft - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules